Is Newag SA’s (WSE:NWG) Balance Sheet Strong Enough To Weather A Storm?

Newag SA (WSE:NWG) is a small-cap stock with a market capitalization of zł671m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into NWG here.

How does NWG’s operating cash flow stack up against its debt?

Over the past year, NWG has ramped up its debt from zł300m to zł317m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at zł35m for investing into the business. On top of this, NWG has produced cash from operations of zł92m over the same time period, resulting in an operating cash to total debt ratio of 29%, meaning that NWG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NWG’s case, it is able to generate 0.29x cash from its debt capital.

Does NWG’s liquid assets cover its short-term commitments?

Looking at NWG’s zł510m in current liabilities, the company has been able to meet these commitments with a current assets level of zł589m, leading to a 1.15x current account ratio. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

WSE:NWG Historical Debt December 10th 18
WSE:NWG Historical Debt December 10th 18

Is NWG’s debt level acceptable?

With a debt-to-equity ratio of 75%, NWG can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if NWG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NWG, the ratio of 6.85x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NWG ample headroom to grow its debt facilities.

Next Steps:

NWG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around NWG’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NWG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Newag to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NWG’s future growth? Take a look at our free research report of analyst consensus for NWG’s outlook.
  2. Valuation: What is NWG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NWG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.